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Microsoft Corp. must split into two companies as punishment for breaking U.S. antitrust laws, a federal judge ordered in his final ruling in the landmark case yesterday.U.S. District Judge Thomas Penfield Jackson's decision could lead to the first breakup of a major U.S. company since AT&T; Corp. agreed in 1982 to a consent decree with the government that led to creation of the "Baby Bells" two years later.A breakup is necessary because "Microsoft as it is presently organized and led is unwilling to accept the notion that it broke the law" and unwilling to change its behavior, Judge Jackson wrote.A lengthy appeals process is likely to be the next step, and Microsoft could file an appeal as early as this week. The company does not have to split until the appeals process is finished, the judge ruled."We will be exercising our right to appeal this decision, and we're confident the judicial system will overturn today's ruling… . I also want to make sure that people understand that during the appeal, we'll continue to do what we do best, which is building new software," said Microsoft Chairman and founder Bill Gates.The Justice Department said it wants the case moved directly to the U.S. Supreme Court, which is allowed by law but must be approved by Judge Jackson.The judge said Microsoft must be split into one company that would develop and market its software applications and one that would make and market its operating systems and servers.Observers say the decision should spur development of more software for consumers, but whether the ruling will bring lower prices is a matter of debate.The operating system company's products would include Windows 95, 98, NT, 2000, the mobile operating system Pocket PC and the new operating system Microsoft had planned to introduce this week.Microsoft's applications company would include products like Microsoft Office, its Internet Explorer browser, the Outlook Express e-mail program and other software. It also would include its hardware, MSNBC cable station, Hotmail and Expedia on-line travel service, among other businesses.The Justice Department and 17 of the 19 plaintiff states recommended Microsoft be broken in two.Attorney General Janet Reno praised the judge's decision as fair."The court's remedy strikes the right balance. The structural remedy will stimulate competition that will have a lasting impact on this important industry, and the interim conduct relief will ensure that Microsoft cannot break the law while the structural provisions are taking effect," she said.The judge gave the company four months to devise a plan to divide itself.He also said no changes will be imposed until Microsoft's appeal of the case is complete.Assistant Attorney General Joel I. Klein said the Justice Department's solicitor general has authorized the federal government to seek direct review by the Supreme Court.Both sides have 15 days to ask the judge to send the case directly to the high court.Microsoft officials believe they have a strong chance of winning in the appeals court."We would oppose such an effort [to take the case directly to the Supreme Court]. We do not believe the government should be afraid of trying its case in front of the appeals court," Microsoft attorney William Neukom said.Robert Bork, an expert in antitrust law and a former U.S. appeals court judge, said Microsoft may prefer to argue its case in appeals court."But I think the basic ruling that they violated the Sherman Antitrust Act is absolutely solid," he said. "Microsoft's best chance is to attack the remedy. They will argue the record doesn't support [a breakup]," said Mr. Bork, who filed a friend of the court brief on behalf of the states.Antitrust laws prohibit two or more companies from acting together to stifle competition and prohibit a company from illegally protecting a monopoly or by using that monopoly to dominate a second industry.The appeals process could drag out the case until early in 2002, Mr. Bork said.In addition to ruling Microsoft be split in two, Judge Jackson handed down a number of actions to prevent monopolistic behavior that he said must take effect in 90 days and remain in place for three years.The judge said Microsoft: Cannot threaten personal computer makers for interacting with products or companies that compete with Microsoft. Must give other software makers a look at Microsoft's "source code." Cannot introduce features that interfere with other software, without notifying the software maker so it can protect its customers. Cannot punish software sellers who promote non-Microsoft products. Cannot try to persuade companies to deal only with Microsoft and not its rivals.Observers debated yesterday the effect of the judge's decision on the technology industry.Ed Black, president of the Computer and Communications Industry Association and a Microsoft opponent, said the decision will spur innovation because more companies will be willing to compete against a smaller, divided Microsoft.Microsoft's stranglehold on the market for operating systems has led to infrequent upgrades of Windows, which was reintroduced in 1995 and 1998. Its Next Generation Windows is expected to come out this month, despite a decision to delay releasing the software.Innovation, spurred by competition, moves faster in other parts of the technology industry, Mr. Black said."That's the difference between an innovative industry and one regulated by a monopoly," he said.But Erick Gustafson, director of technology and communications policy at Citizens for a Sound Economy, which supports Microsoft in the antitrust case, said the decision does not bode well for the rest of the industry."If the government gets into the business of regulating the biggest technology company in the world, it will affect the rest of the industry," he said.Judge Jackson made his decision just one day after the Redmond, Wash.-based software developer filed its final response in the antitrust case that began in May 1998, when the Justice Department, 19 states and the District of Columbia claimed the company abused its market power to stifle competition.It did that, they claimed, by leveraging its Windows operating system to push its Internet browser.Microsoft rose 87 cents to $70.50 a share during the regular session on the Nasdaq stock exchange. Judge Jackson issued his ruling after the markets closed. In after-hours trading, the shares had risen to $72 by early evening.

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